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Health Care Reform Memo: April 12, 2010

Deloitte Center for Health Solutions publication

The health care reform memos are issued on a weekly basis, highlighting news from the previous week's activities in the administration and implications for the C-suite and various stakeholder groups.

The big picture on the health reform bill

The Patient Protection and Affordable Care Act (PPACA) will cost $940 billion over ten years with a forecast surplus of $143 billion (2010-2019) and $1.2 trillion (2020-2029) per the Congressional Budget Office (CBO). Spending will be split primarily between subsidies for individuals to purchase insurance ($400 billion/ 2014-2019) and increased funding for Medicaid enrollment expansion ($500 billion/ 2014-2019). The costs for expanded coverage for the first ten years of the program (2014-2023) will be $1.6 trillion.

Several underlying assumptions regarding the projected surplus projected be realized in the 10-20 year time horizon rest in three major areas:

  1. Delivery system reforms: i.e. accountable care organizations, value-based purchasing, incentives tied to performance rather than volume, and implementation of information technologies to reduce waste and inappropriate variation. Many of these will be treated as demonstration projects starting with Medicare, and others as the result of the new Center for Innovation.
  2. The tax on high-cost health plans: Though not kicking in before 2018, it is deemed a major factor in slowing health costs by limiting high-value insurance plans sponsored by employers. Originally a major source of funding for reform, it will contribute $32 billion in new taxes 2018-2019 per the Joint Committee on Taxation.
  3. The Independent Medicare Payment Commission: With increased power, it will likely become a force in setting payment rates for Medicare and Medicaid. Slowing the rate of growth for entitlement spending—Medicare, Medicaid, Social Security—is seen as a major necessity for economic recovery.

Critics of the reform bill cite its failure to restrain health cost as a major flaw while supporters believe it achieves the dual goals of reduced cost and increased access. No one knows for sure.

Employer impact of Patient Protection and Affordable Care Act

The impact of the health reform bill on employers might rival the Employee Retirement Income Security Act of 1974. Consider these changes that start on or before September 23:

  • Eligible children up to 26 years of age who don’t qualify for other coverage must be covered under the employer’s plan (employers must affirm dependents are ineligible for other coverage).
  • Qualified employer plans can no longer have lifetime limits on medical spending or otherwise restrict annual dollar limits (requires self-insured employers to re-work stop loss coverage).
  • New regulations on claims appeal processes, cost-sharing arrangements and “essential health benefits” that must be covered.
  • Employers offering insurance to early retirees between ages of 55 and 64 will have access to a new reinsurance program (starts June 23—federal government pays 80 percent of early retiree claims between $15,000 and $90,000).

Beyond 2010 other changes will kick in with potentially material impact for employers—

  • In 2011, penalties for using HSA funds for non-medical expenses will double from 10 percent to 20 percent and over-the-counter medications will be excluded from the definition of medical expenses for employer-provided health coverage.
  • For taxable years beginning after 2012, flex accounts will have a ceiling of $2,500.
  • And 2014 when health exchanges begin operation is the “big” year for employer benefits:
    • Employers face penalties of $2,000 per employee if only one employee purchases coverage thru the exchange.
    • Employees who meet income thresholds will be eligible for vouchers to purchase insurance.
    • Employers will be able to increase incentives for wellness program investments from 20 percent to 30 percent of the cost of the insurance premium (or up to 50 percent for Department of Health and Human Services (HHS) approved plans).

To complicate matters, some plans will be grandfathered: HHS has 90 days to issue guidance as to specifics of which plans this includes.

Note: The health care industry currently employs 15.6 million and saw employment increase 732,000 during the downturn when the economy lost 8.4 million jobs. In most communities, it is in the top five employers, yet in many sectors (biotech, medical devices, information technology, medical practices, health plans, etc.), large numbers of its employers are small businesses.

The promise and reality of electronic health records

Information technology is referenced 44 times in the Patient Protection and Affordable Care Act. The President believes it is key to better care and lower costs. Some recent postings of note:

Electronic medical records linked to clinical decision support tools: In a study of 2900 hospitals, Massachusetts General Hospital researchers found no significant relationship between the use of electronic health records (EHR) and performance on quality measures for acute myocardial infarction, congestive heart failure and pneumonia, and a weak relationship for management of surgical complications. They found EHR adoption did not significantly reduce length of patient stay, readmission rates or total inpatient costs, but positive results where the EHRs had clinical decision support and computerized physician order entry application (Source: DesRoches et al, “Electronic Health Records' Limited Successes Suggest More Targeted Uses,” Health Affairs, 29, no. 4 (2010): 639-646).

Linkages to support patient coaching important to clinical decision support with evidence-based algorithms and personal health records with patients: Australian researchers conducted a search testing the accuracy of the diagnosis for 26 published cases . They found only 15 recommendations were accurate diagnoses noting complex conditions with unique signs and symptoms prompted more accurate search results than others (Source: Tang et al “Googling for a Diagnosis” British Medical Journal 2006; 333; 1143-1145). E-prescribing update: 18 percent of all prescriptions were electronic in 2009, up from 6.6 percent in 2008 (Source: Surescripts, “Advancing Healthcare in America: 2009 National Progress Report on e-Prescribing, plus what’s ahead in 2010 and beyond”).

Note: the American Recovery and Reinvestment Act of 2009 (stimulus bill) authorized widespread deployment of electronic health records in medical practices and hospitals.

Health insurance plans prepare for impact

The consensus is provisions of the reform bill impact health insurance companies soon and significantly. Consider:

  • In 2010, plans will not be allowed to exclude children under the age of two for pre-existing conditions, and are precluded from rescission of coverage for policyholders and lifetime limits on individual and group products. They must enroll eligible children up to 26 years of age in their parents’ plan, and adhere to new reporting requirements about quality and premium dollars spent on medical care.
  • In 2012, cuts to Medicare Advantage Plans (Part C) take effect (plans will receive 95 percent in high costs areas to 115 percent in low cost areas of Medicare fee for service rates).
  • In 2014, Medicare Advantage Plans must have a minimum 85 percent medical loss ratio (if less than 85 percent, the plan would pay a penalty to CMS or risk being kicked out of the program), the industry’s fee begins ($8 billion in 2014 increasing to $14.3 billion in 2018 and after), and state-run health insurance exchanges begin operation along with the federal program to oversee premium increases.

Arguably, plans might gain from the 32 million newly insured resulting from the bill, but their enrollment hinges on the success of the individual mandate. Some speculate the penalty might be inadequate to encourage enrollment: in 2014, the penalty is $95/person increasing to $325/person in 2015; and $695/person in 2016 or up to the greater of 2.5 percent of income or a penalty of $2,250/family). Is the penalty adequate to encourage enrollment? Will uninsured adults wait until they are sick to enroll? It is perhaps the biggest unknown in the legislation.

Fraud surveillance gets additional funding in reconciliation

An additional $350 million/10 year investment in fraud surveillance was added to the bill in the reconciliation process (HR4872). It also expanded provisions of the False Claims Act to allow closer scrutiny of health plans and encourage more whistle blower lawsuits. An HHS report suggested the Medicare error rate in billing/claims at 12 percent. The CBO estimates that Medicare fraud in 3 percent of its costs—about $13 billion/year.

Hanging “chads”

Every piece of legislation results in additional legislation/administrative actions to correct/address unintended negative consequences or enable administration of the bill. The Patient Protection and Affordable Care Act will no doubt have many. For example:

  • The bill proposes that the IRS pay credits to insurance companies on behalf of households that obtain coverage through the health exchanges. But eligibility is based on current income; the IRS has data for past income. And the mechanism for defining a household for coverage purposes is somewhat different from the definition for IRS filing purposes, so more to come.
  • The bill raises Medicaid eligibility to 133 percent of the federal poverty level and forecasts increased enrollment of 16 million in the program starting in 2014, but the supply of physicians and allied health professionals to accommodate them might be stretched and none of the bill’s near-term accommodations (expansion of community health centers, residency slots) seems to address likely pent up demand.

More to come.

Physician disclosures for diagnostic imaging

The Patient Protection and Affordable Care Act requires referring physicians who provide MRI, CT or PET scans/services and any other designated health services under the in-office ancillary services (with exception of the federal Stark law) to inform each patient in writing at the time of the referral that the patient may get their tests done by other suppliers in the area. The notice must include a list of such other "suppliers in the area” and is effective immediately.

Q&A

Each week, we will respond to Monday Memo readers’ questions relevant to the implementation of the health reform bill.

Q: How will the bill impact access to primary care? If so many newly insured hit the system, won’t the physician shortage that already exists gets worse?

A: Yes, it’s a real problem. The current shortage of PCPs (general internal medicine, family medicine, pediatrics, and ob-gyn) is 28,000 and it will likely get worse. In Massachusetts, where 97 percent of the population is insured, including 500,000 insured in the state’s new reform plan, the wait for a new patient is 44 days. However, the bill makes some encouraging steps to accommodate demand:

  1. Increased payments for primary care providers (especially those who see disproportionately high numbers of Medicaid/underserved populations)
  2. Workforce improvements: changes in the way physicians work in teams with other providers via the medical home and others
  3. Expansion of primary care residency programs
  4. Additional funding for the National Service Corps to encourage physicians to choose primary care
  5. Expansion of community health centers (CHCs) and federally qualified health clinics (FQHCs)

Is this enough? Likely not. If the cost curve is to be bent, scope of practice issues that limit the role of nurse practitioners will need to be addressed. State Medical Boards have fought expansion in most states. The AMA has been harsh in its assessment issuing a cautionary report AMA Scope of Practice Data Series suggesting loosening of restrictions that would allow mid-levels to write prescriptions, operate in private practice settings, and bill health insurance plans directly will result in erosion of quality. Yet data show many conditions are treated safely and appropriately by advanced practice nurses, and the growing success of retail clinics (1,140 operating today) suggest patients embrace alternatives (the core market for retail clinics are commercially insured working females with children who prefer the convenience and lower costs for uncomplicated care).

Q: How do accountable care organizations actually work?

A: Starting in January 2012, Medicare will pay accountable care provider groups that agree to manage at least 5,000 Medicare patients for at least three years bonus payments based on costs and quality results. The accountable care organization (ACO) must include an adequate number of primary care providers to accommodate demand and have a legal structure that allows participating providers to share in the bonus. The legislation permits Medicare to enter into partial capitation agreements with ACOs to hedge against risk associated with severity in the patient population and reduce the likelihood of delayed or limited access. According to the Congressional Budget Office, the ACO pilots will save $5.9 billion from 2012 to 2019, but some believe its potential is substantial IF successful physicians- hospital integration occurs and payers (Medicare, commercial plans) change incentives from volume to performance-based payments.

There remain questions about ACOs: how much will the bonuses be? What criteria will be used to weight quality and cost results? Which providers may participate? HHS is likely to issue directives in the next 180 days. Meanwhile, a number of pilots are planned.

Note: the Deloitte Center for Health Solutions will release its new report “Accountable Care Organizations: A new model for sustainable innovation” next week.

Quotable

“Obamacare has taken the most idiosyncratic feature of American health care—the fact that the onus for providing health insurance falls first and foremost on companies rather than individuals or the government—and set it in concrete. America is the only rich country that makes use of this halfway house of a system.”

 – The Economist March 27, 2010

“It’s wrong to recommend the use of treatments where the additional benefit is uncertain. This is misleading for patients and wastes scarce NHS resources.”

 – Andrew Dillon, Director, the National Institute for Health and Clinical Excellence (the NHS Comparative Clinical Effectiveness program), responding to a promise by Conservative Party leader David Cameron’s promise to devote funds to increased coverage for cancer treatment. The U.K. Parliamentary elections are set for May 6. Five year survival rates for breast and prostate surgery for the U.S. are 91.9 percent and 83.9 percent vs. 69.7 percent and 51.1 percent in the U.K.

“Let’s face it. We have a shortage of primary care physicians in this country and it’s an area that physicians have not been interested in or there wouldn’t be a shortage.” 

 – Dee Swanson, President, American Academy of Nurse Practitioners

“The Food and Drug Administration is known for its rigor in regulating drugs, not devices. That may be about to change…a modernized and more appropriate approach to their regulation should not be limited to better pre-approval evaluation. The payoff from increased investment in post-approval studies would be substantial.” 

 – Alan Garber “Modernizing Device Regulation” New England Journal of Medicine 362: 13 (April 1, 2010)

Fact file

  • The U.S. population will likely be 310 million per the 2010 census count underway, up 10.3 percent from the 281 million counted in 2000. Caucasians will be 65 percent followed by Hispanics (16 percent), African Americans (14 percent) and Asian Americans (5 percent). Note: Seven states will pick up Congressional seats led by Texas picking up four; nine states will lose a seat and two (NY, Ohio) will lose two. (Source: U.S. Bureau of the Census preliminary forecast)
  • The correlation between hospital volume and mortality rates for Medicare patients with acute myocardial infarction, heart failure and pneumonia: mortality rates are optimal and quality improvement levels off for hospitals with at least 610 MI, 500 HF and 210 P cases. (Source: “Hospital Volume and 30 Day Adjusted Mortality for Common Conditions” New England Journal of Medicine, 362:12 (March 25, 2010)
  • Employer-sponsored health insurance covers 160.6 million people under the age of 65—60 percent of the U.S. population. Employer costs for health care benefits have increased five times the rate of inflation in the past decade. (Source: National Opinion Research Center at the University of Chicago)
  • Medication errors harm 1.5 million Americans annually and kill 7,000. The cost for medication non-adherence is $290 billion/year. (Source: Institute for Healthcare Improvement, New England Healthcare Institute)
  • In the past four years, 15 institutions have notified the Liaison Committee on Medical Education (LCME) of their plans to open new medical schools. Of these, four enrolled their first classes in 2009. (Source: ACGME)
  • Nurse practitioners today: 139,000 vs. 270 in 1970 (Source: American Nurses Association)
  • State medical boards issued 5,721 disciplinary actions against physicians in 2009, a 6.4 percent increase over 2008. (Source: Federal of State Medical Boards’ Composite Action Index)
  • The rate of hospital admissions for heart attack was 23 percent lower in 2007 compared to 2002 – 319,063 heart-attack admissions, representing a reduction of 97,000 versus comparable figures in 2002. (Source: CMS analysis of Medicare data for Medicare Advantage and Medicare FFS patients)
  • 34 states currently operate high-risk pools for individuals with pre-existing conditions who can’t purchase health care insurance elsewhere. They compose 2 percent of the individual insurance market and pay premiums averaging 125-200 percent of standard rates. (Source: Kaiser Family Foundation, January 2010)
  • Of the 140 health information exchanges, five states lead: New York (17), Michigan (12), Florida (10), California (9), Arizona (7). (Source: eHealth Initiative)
  • Recommended moderate intensity physical activity per week per federal guidelines: 150 minutes per week. (Source: U.S. Preventive Services Task Force. Note: preventive health is a key theme in the health reform bill)
Health Care Reform Footprints

National health reform: What now?

National health reform is here. The health reform bills (HR3590 and HR4872) are now law and will trigger sweeping changes and disruptions – some rather quickly and some over many years. The industry is asking, “What now?” At Deloitte, we continue to explore and debate the key questions facing the industry, and we look forward to helping our clients find and implement the right answers for their organizations.To learn more, visit www.deloitte.com/us/healthreform/whatnow today.

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